50766999.

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China
Negotiated M&A Guide
Corporate and M&A Law Committee


Contact

Marco Marazzi

Baker & McKenzie LLP
Shanghai, China

marco.marazzi@bakernet.com





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1. INTRODUCTION
1.1 Investment Overview
The foreign investment regime of the Peoples Republic of China (PRC or China) has evolved
considerably in recent years. With its rapidly expanding market, the consensus of international investors
is that, by most counts, China is currently one of the most promising jurisdictions in the world for foreign
investment.
However, international investors have also pointed out that the current foreign investment regime in China
is far from perfect. Despite its determination to pursue a market economy and comply with international
practices, China remains a socialist state with planned economy influences and its government still
emphasizes stability and control above all else. Pioneering foreign investors who have been operating in
the PRC during the past few decades have long been used to a highly non-transparent and bureaucratic
system that requires foreign investors to unravel opaque local laws and practices and navigate around
numerous restrictions that only apply to foreigners. Complex approval processes, layers of government
bureaucracy, undue political pressure, together with inconsistent interpretation and enforcement of laws
are phenomena that have long plagued foreign investors operating in this country.
1.2 Special Notes
This guide approaches the topics covered herein primarily from a foreign purchasers point of view. This
guide does not seek to cover issues in relation to M&A initiated by domestic PRC companies and only
touches marginally on issues that are typically to be considered and resolved by sellers. For the purposes
of this guide, the terms PRC or China do not include Hong Kong, Macau and Taiwan.
In addition, this guide does not seek to cover tax related issues. The discussion of the M&A transaction
structures in this guide is subject to further review of its tax implications.
This guide is not a comprehensive legal opinion and must not be regarded as a substitute for specific
legal advice on the matters covered by this guide.
1.3 Forms of Establishment in M&A
Foreign investors usually establish a presence in the PRC via one or more of the following legal forms in
a M&A Transaction:
i) Sino-Foreign Joint Venture (JV);
ii) Wholly Foreign-Owned Enterprise (WFOE); and
iii) Foreign-Invested Joint Stock Limited Company (FISC).
JVs and WFOEs take the form of a limited liability company (LLC) that does not issue shares but has
registered capital and total investment (paid-up capital plus permitted borrowing) amounts that are
both approved by the PRC government. FISCs, which are currently rare in China by comparison, are
share-issuing companies similar in legal form to Western style corporations. JVs, WFOEs and FISCs are
collectively known as Foreign-Invested Enterprises (FIEs) if the foreign shareholding in these
enterprises reaches 25 percent or greater.
The following paragraphs briefly summarize each of the common foreign investment vehicles in China:

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1.3.1 Sino-Foreign Joint Ventures
A JV is typically a non-share-issuing, limited liability company formed between one or more non-PRC
entities (including Hong Kong, Macau and Taiwan entities) with one or more Chinese entities. A JV can
be set up in the form of an Equity Joint Venture (EJV) or a Cooperative Joint Venture (CJV), which are
structurally similar in most respects. JVs have definite, albeit extendable, terms of operations.
JVs are popular investment vehicles either for foreign investors less familiar with investment in China that
would prefer a local partner with connections to help handle local issues or for those investing in certain
industries that require the participation of a Chinese partner under the current PRC legal regime. Most
investors seeking to establish JVs in China choose to set up their ventures as EJVs. Investors typically
adopt a CJV structure if they specifically desire to adopt a non-legal person structure, need more freedom
in configuring their profit distribution ratios or prefer the ability to recover their investments early under
certain circumstances (these are the main benefits of a CJV structure not available for typical EJVs).
1.3.2 Wholly Foreign-Owned Enterprises
A WFOE is a limited liability company 100 percent owned by one or more foreign entities (in other words,
a JV formed between two foreign investors would also be categorized as a WFOE in China), although
currently most WFOEs only have one investor. As in the case of a JV, the ownership of a WFOE is also in
the form of equity interests and no shares are issued. Like JVs, WFOEs have definite, albeit extendable,
terms of operations.
During the past ten years, WFOEs have become popular investment vehicles especially favored by
foreign investors that are more familiar with investment in China. This usually means that there will be
greater flexibility in terms of management and control, and less complexity arising from having to deal
with Chinese partners. However, because it is wholly foreign-owned, a WFOE may be subject to more
stringent investment restrictions with respect to the types of activities in which it may engage, especially in
certain sensitive industries such as automotive, steel and financial services.
1.3.3 Foreign-Invested Joint Stock Limited Companies
Unlike JVs or WFOEs, the shareholding of the investors in a FISC is in the form of issued shares, similar
to Western-style corporations. As such, a FISC is the only form of FIE that can be directly listed on PRC
stock exchanges. Other forms of FIEs would have to be converted into an FISC before they could be
listed. Unlike a JV or a WFOE, a FISC can be operated for an unlimited duration.
The formation requirements of an FISC are much more stringent than those of JVs and WFOEs. For
example, the sponsors of FISCs are subject to additional restrictions and qualification requirements and
the foreign equity holding in an FISC cannot be lower than 25 percent; a FISC is required to have a
minimum registered capital of RMB 5 million (in some special industries such as banking, telecom etc. the
minimum registered capital is higher); and the approval procedures for establishment of FISCs are also
generally more burdensome.
1.4 Business Scope
Under PRC law, all entities in China (whether domestic or foreign invested) are allowed to engage only in
those activities within the business scopes approved by the governmental authorities and as stated on
their business licenses.
The Foreign Investment Catalog and Sector-Specific Restrictions
The Regulations for Guiding the Direction of Foreign Investment (the Foreign Investment Guidelines)
and the Catalog for Guiding Foreign Investment in Industries (the Foreign Investment Catalog) serve
as general indications of the current policies governing foreign investment in various industries. These

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documents provide certain policy incentives or disincentives depending on whether a project is deemed
encouraged, permitted, restricted or prohibited. An enterprise in the encouraged business
category, for example, may be qualified for local (and generally more lenient) approval processes. An
enterprise conducting restricted activities, on the other hand, may be subject to additional scrutiny by
higher approval authorities during the establishment process and may in some cases be required to have
its Chinese partner(s) control more than 50 percent of the equity holding in the company. These
documents are important guidelines that affect many aspects of merger and acquisition activities outlined
in this guide.
Some industries such as mining, education, postal service, media etc. are still restricted or prohibited
(as listed in the Foreign Investment Catalog). Some restrictions, however, have been removed pursuant
to Chinas WTO commitments. With the implementation of WTO commitments, foreign investors have
gained greater access to these and other sectors.
On the other hand, industries that do not fall under the restricted or prohibited categories of the
Catalog are deemed to be permitted industries for foreign investment.
1.5 Brief description of applicable corporate and other legislation
M&A in China are mainly governed by the following PRC laws and regulations:
i) Regulations on the Merger and Acquisition of PRC Domestic Enterprise by Foreign Investors (the
M&A Rules) governing the rules and requirements for M&A of PRC domestic company initiated
by foreign investors in China;
ii) Several Rules on the Change of Shareholding of Foreign Invested Enterprise governing the share
transfer of FIEs between/among foreign investors;
iii) Sino-foreign Equity Joint Venture Laws and its Implementing Rules governing EJV;
iv) Sino-foreign Cooperative Joint Venture Laws and its Implementing Rules governing CJV;
v) Wholly Foreign Owned Enterprise Laws and its Implementing Rules governing WFOE;
vi) Provisional Rule Regarding Several Issues of the Establishment of Foreign Invested Joint Stock
Limited Company governing FISC;
vii) Catalog for Guiding Foreign Investment in Industries governing the investment area by foreign
investors; and
viii) PRC Company Law.
2. STRUCTURE OF THE TRANSACTION
2.1 Common Types of Acquisition Transactions in the PRC
A foreign investor who wishes to acquire an equity interest in a PRC target would commonly do so in one
of the following ways.
2.1.1 Direct Acquisition
The foreign investor may purchase all or part of the equity interest of the PRC target company directly
from one or more of the investors in the target company (direct acquisition), or by subscription for
capital of the target. The direct acquisition transaction is conducted in the PRC and will be subject to full
PRC approval requirements, which may be time consuming and involve government discretion, i.e. the

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PRC examine and approval authority (the PRC Approval Authorities)
1
may withhold approval if they
perceive problems with the transaction.
2.1.2 Offshore/Indirect Acquisition
Alternatively, the foreign investor may acquire or increase control of the PRC target company via the
offshore purchase of some or all of the shares of the PRC target companys foreign parent(s) (offshore
acquisition or indirect acquisition). This option is available only if the PRC target company has
foreign investors and applies only to acquisitions of interests in such foreign investors.
An offshore transaction will be conducted in the jurisdiction of incorporation of the offshore company and
is generally not subject to PRC jurisdiction and review, except in certain circumstances pursuant to the
antitrust review regime in the PRC. In addition, if the offshore companys ultimate shareholder or
shareholders are PRC nationals, certain PRC filings should have been made with the foreign exchange
authorities in the PRC and should be reviewed during the due diligence process.
2.1.3 Asset Acquisition
A foreign investor may, using a new FIE or an existing FIE as the acquiring vehicle, purchase directly
some or all of the business and assets of the PRC target company. Such transactions are subject to PRC
jurisdiction and relevant PRC approval requirements.
2.2 Special Types of Acquisition
2.2.1 State-Owned Interests and Special Types of Acquisition
As a remnant of its planned economy history, China has a large number of state owned enterprises
(SOE) or private corporations with state-owned interests. In an attempt to accelerate their transformation
to viable enterprises through the utilization of foreign participation, the Chinese government has issued
special regulations governing the acquisition by foreign investors of interests in such SOEs or state-
owned interests in companies. One of the special means of acquisition provided for in the regulations is to
allow foreign investors to acquire domestic creditors rights in the target and thereby qualify for the
opportunity to later convert such debts into equity in the companies (similar to a convertible bond
concept).
The normal means of direct equity/asset acquisition applicable for regular companies outlined above will
also apply, subject to certain special rules and restrictions. Furthermore, there could be additional issues
involved with such acquisitions, such as state-asset valuations and employee resettlement issues.
If the acquisition involves a transfer of state-owned assets, regardless of whether the target is or is not an
existing FIE, the seller must appoint an asset appraisal institution with appropriate qualifications to carry
out an asset appraisal. The appraisal results must be either verified or recorded with the finance
authorities, and the approved or registered appraisal results shall form the basis for the transaction price.
In general, the transaction price and the appraised price may not differ by more than 10 percent.
Appraisals are not generally required for transfers of equity in FIEs, unless the equity being transferred is
state-owned equity in the FIE held by a Chinese investor. In such cases, the appraisal rules described in
the preceding paragraph apply.

1
The PRC Approval Authority is in charge of reviewing and approving foreign investment and M&A projects in China. Normally it is
the Ministry of Commerce at the central level and Commission of Foreign Economic and Trader Cooperation at the local level (exact
name may vary from place to place.)

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2.2.2 Mergers
Western-style mergers between two companies are possible but are rarely seen in the PRC. Current PRC
statutory mechanisms recognize two means of mergers: a merger by absorption or a merger by new
establishment. A merger by absorption involves the absorption by one company of another following
which the absorbed company is dissolved and its registered capital and assets merged into the surviving
entity. In a merger by new establishment, both pre-merger companies are dissolved and a new
company is established, holding an aggregate of the pre-merger companies assets and registered capital.
Generally, the post-merger entity would be a complete successor of the premerger entities in that it would
assume all rights and liabilities of such entities. However, creditors of the companies to be dissolved are
given the option of having their claims repaid in full prior to the completion of the merger.
Whether the merger is a horizontal merger or vertical merger (defined by the merged entities market
positions) does not have an impact on the PRC regulatory process.
It should be noted that cross-border mergers are currently unavailable under PRC law, i.e. it is not
possible to directly merge a foreign entity with a domestic company (including FIEs). As far as foreign
investors are concerned, the only permissible forms of mergers in China are between FIEs and FIEs, or
between FIEs and domestic companies. In order to effect these mergers, the FIE must be fully capitalized
and have commenced operations. The merger should comply with the Foreign Investment Catalog and, in
principle, the post-merger FIE should also comply with all other aspects of the PRC legal regime
governing FIEs.
As mergers are rarely seen in the PRC in practice, we will focus mainly on share and asset acquisitions.
2.3 Advantages and Disadvantages of Different Types of Acquisitions
2.3.1 Equity Acquisitions
Direct acquisitions and offshore/indirect acquisitions mentioned in the previous section are, in aggregate,
commonly referred to as equity acquisitions, as the purchaser would be acquiring equity interests in,
rather than assets of, the target company. An equity acquisition structure will present the following
general advantages and disadvantages.
A. Direct Acquisitions
Advantages
This is the only equity acquisition option available if the PRC target is a purely domestic company with no
foreign parent company, i.e. not an FIE. Conversely, indirect acquisition would simply not be available
without a foreign parent. In addition, compared to an asset acquisition, a direct equity acquisition is
generally simpler and less administratively burdensome. This is because the foreign investor does not
need to pick and choose its preferred assets and businesses of the PRC target company or execute
individual assignment contracts for the assets and businesses (that may be subject to different formality
requirements).
Disadvantages
As opposed to indirect (offshore) acquisitions, direct acquisitions will be subject to approval by the
relevant PRC Approval Authorities. Not only is this process time consuming but also presents
opportunities for PRC authorities to scrutinize, and possibly intrude on, the parties contractual terms.
Meanwhile, various specific PRC legal requirements, such as state-owned asset appraisal (as mentioned
in section 2.2.1), may also apply to the transaction and may add further complications and variables to
the process.

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The foreign purchaser will assume all of the existing or contingent obligations/liabilities of, and restrictions
applicable to, the PRC target company, in proportion to its equity holding therein.
B. Offshore/Indirect Acquisitions
In an offshore acquisition, the buyer acquires all the shares of an offshore entity which holds 100% of the
equity of the target FIE in China. This structure is often seen when the offshore entity holding the target
FIE is a special purpose vehicle established specifically for holding the FIE.
Advantages
Under this structure, neither the equity holding structure nor the assets of the target company would be
directly affected. The transaction can be completed entirely offshore and therefore is not subject to the
approval of the PRC authorities, unless PRC antitrust review is required. If the ultimate target company is
a joint venture company in China, then it is possible, based on the terms of the relevant joint venture
contract, that consent from the other partners of the PRC target company, or from the board of directors
of the PRC target company, will not be necessary. Therefore, assuming that the offshore transaction is
conducted in a foreign jurisdiction with relatively straightforward formality requirements, an offshore
acquisition can be the simplest and least administratively burdensome form of acquisition structure.
Disadvantages
First of all, this option is less flexible than a direct acquisition in that it cannot, as mentioned above, be
used for acquisitions of purely domestic targets with no foreign shareholders. Investors should also note
that, as described in the section below, asset acquisitions generally will require an established FIE in
China and cannot be conducted offshore.
Unlike in an asset acquisition, the foreign investor cannot avoid acquiring (indirectly) claims against the
enterprise. That is, the existing or contingent obligations/liabilities of, and restrictions applicable to, the
PRC target company will be unaffected by the acquisition. Also, the assets cannot have a step-up basis in
China for tax deduction purposes.
2.3.2 Asset Acquisitions
Chinese law generally permits the acquisition of assets by a foreign purchaser, but only where the foreign
purchaser establishes a registered presence in the form of an FIE, be it a new FIE established in
connection with the acquisition or an existing and operative FIE. In certain types of industries, such as
insurance and banking, it is also possible to open a branch for the purpose of such asset acquisition.
While the purchase and ownership of certain assets, e.g. real estate and vehicles, by foreign individuals
or entities is not prohibited, generally the acquisition and operation of assets for business operation
purposes would require the establishment of an FIE. Such an asset acquisition structure will present the
following advantages and disadvantages, as compared with both forms of equity acquisition described
above.
Advantages
The foreign investor will be able to select and acquire only the preferred business and assets of the PRC
target company. Generally speaking, any existing obligations, liabilities or restrictions of the PRC target
company will remain the sole responsibility of the PRC target company. In addition, subject to a few
exceptions (depending on the type of assets that are transferred), asset transactions are generally not
subject to the approval of any PRC authorities. However, if the buyer establishes a new FIE and uses this
FIE to acquire and operate the assets of another PRC company or acquires the assets of another PRC
company and uses such assets to establish a new FIE, then the PRC M&A Rules would apply and
approval by the PRC authorities would be required.

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Disadvantages
An asset acquisition tends to be more complex than an equity acquisition since the transaction may
involve the transfer of different categories of assets and liabilities of the PRC target company, each
carrying separate statutory formality requirements. In addition, if a new FIE is to be established for the
purpose of carrying out the asset acquisition, separate approval from the Chinese authorities will be
required for its establishment. Finally, there may be tax considerations for the parties in relation to the
transfer of assets, as asset acquisitions are always taxable in the PRC.
2.4 Assumption of Liabilities
Generally speaking, the foreign purchaser in a share acquisition will assume all of the existing or
contingent obligations/liabilities of, and restrictions applicable to, the PRC target company in proportion to
its equity holding therein. In an asset transaction, any existing obligations, liabilities or restrictions of the
PRC target company that are not assumed by the acquiring entity will generally remain the sole
responsibility of the PRC selling company.
However, there are a number of regulations and Supreme Court interpretations on the issue of the
assumption of liabilities in an enterprise-restructuring context that vary depending on the specific type of
transaction. While this guide will not discuss these rules in detail, investors should note that a final
determination regarding the question of debt assumption can only be made after careful consideration of
these rules.
2.5 Possible Post-Acquisition Issues
As discussed in the sections above, in an indirect equity acquisition neither the equity holding structure
nor the assets of the target company are directly affected. A direct acquisition, on the other hand, will
have a direct impact on the target companys equity holding structure. In a direct equity transaction, the
PRC target company may need to be converted into an FIE depending on the final shareholding structure.
While an asset transaction would not trigger any corporate conversion by itself, i.e. the selling company
will remain the same type of company after the transaction, if the target company has sold the whole or
the vast majority of its business or assets to the acquiring FIE, the asset acquisition may be followed by
the liquidation and dissolution of the selling company.
Finally, separate formalities may be required if the new foreign investor wishes to amend the corporate
details of its own PRC entity or the target company (name change, change of corporate officers, etc.)
upon completion of the transaction. If any employees are transferred pursuant to the transaction, the
relevant labor bureau registrations should also be amended. There may also be certain governmental title
registration requirements associated with specific types of assets.
3. ANTI-TRUST REVIEW
The new Anti-Monopoly Law was adopted by the National Peoples Congress on 30 August 2007 and
came into effect on 1 August 2008. The Anti-Monopoly Law stipulates that there will be mandatory
antitrust reviews of foreign mergers and acquisitions of domestic companies or foreign capital
investments in domestic companies operations in other forms. The enforcement of the Anti-Monopoly
Law is shared among three Chinese governmental authorities: the Law Enforcement Bureau for Anti-
Monopoly and Unfair Competition of the SAIC, the Department of Price Supervision of the NDRC, and the
Anti-Monopoly Office of the Department of Treaty and Law of MOFCOM. These three authorities are
respectively responsible for unfair competition, pricing monopolies and merger control.
The filing thresholds are prescribed under the State Council Regulations on the Notification Thresholds of
Concentrations (Concentration Regulations) promulgated on 3 August 2008 and effective on the same

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date. Pursuant to the Concentration Regulations, the foreign purchaser in an offshore acquisition is
required to submit the acquisition plan to MOFCOM if one of the following thresholds is fulfilled:
The combined worldwide revenue in the preceding accounting year of all business operators
participating in the concentration exceeds RMB10 billion, and each of at least two business
operators has revenue in the PRC exceeding RMB400 million; or
The combined revenue in the PRC in the preceding accounting year of all business operators
participating in the concentration exceeds RMB2 billion, and each of at least two business
operators has revenue in the PRC exceeding RMB400 million.
MOFCOM has formulated separate measures for computing the turnover for concentration involving
banking, insurance, securities, futures and other special industries and sectors. Notably, MOFCOM has
residual discretion under the Concentration Regulations to investigate any transaction that has not met
the quantitative thresholds, but that may have the effect of limiting or eliminating competition in China.
Under certain circumstances where the acquisition will improve conditions for fair market competition,
improve the environment, safeguard employment, enhance the enterprises ability to compete
internationally, etc., the parties to the acquisition may apply to MOFCOM for exemption from the antitrust
review.
4. PRE-AGREEMENT
4.1 Preliminary/Framework Agreement
There is no strict PRC legal requirement for a preliminary/framework agreement between the parties,
such as a letter of intent (LOI) or memorandum of understanding (MOU), in the context of merger and
acquisition transactions. Nevertheless, an LOI or MOU is an important tool that can be used to reach
agreement, at an early stage, on the principles, basic terms and contemplated procedures of a proposed
transaction, and is usually prepared in major transactions. It should be noted that although LOIs and
MOUs are generally stated to be non-binding in nature, the Chinese parties typically expect that all the
terms contained in the LOI/MOU will eventually be replicated in the formal agreements should the
transaction proceed.
Generally, aside from special issues that parties wish to include in the document, an LOI/MOU would
stipulate the following key terms of the transaction:
i) Identities of the parties;
ii) Total purchase price, timing and method of payment;
iii) Total investment, registered capital and business scope of the target company post-acquisition;
iv) Equity percentages and form of capital contribution by the investors (if a new joint venture will be
set up);
v) New management arrangements;
vi) Land use arrangements;
vii) Labour arrangements;
viii) Trademark and technology licensing and other ancillary agreements;
ix) Conditions precedent that must be satisfied in order for the transaction to proceed;

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x) Exclusivity (no shop or lock-up) and confidentiality obligations (this should expressly be made
legally binding on the parties);
xi) The purchasers right to due diligence and sellers undertaking to cooperate and participate (this
should expressly be made legally binding on the parties); and
xii) Further steps to be undertaken by the parties in order to proceed with the proposed transaction.
4.2 Lock-up agreements with major shareholders.
It is not common to see the buyers enter into a separate lock-up agreement with major shareholders at
the pre-agreement stage. Normally, this issue is addressed in the no-shop/exclusivity clause in the
LOI/MOU.
5. ACQUISITION AGREEMENT
5.1 Holdback and escrows
5.1.1 Holdback / Adjustment
The purchase price is normally paid in instalments after closing and is subject to post-closing adjustments.
However, purchase price adjustments are sometimes difficult to enforce due to PRC regulatory approval
and restrictions on purchase price payment. In particular: i) transaction documents must be filed with the
PRC authority for review and approval; ii) under the PRC M&A Rules, the purchase price must be paid in
full within 3 months (which may be extended to 1 year subject to approval by the PRC authority), counting
from the issuance of the new business license of the target as a result of the acquisition; and iii) in the
case of an onshore acquisition, the foreign investor must remit funds into China, which will be subject to
regulatory supervision by the State Administration of Foreign Exchange (SAFE). In general, the SAFE
will issue a certificate to the Chinese domestic seller stating the amount (equivalent to the purchase price)
it has to receive. The foreign investor needs to remit the funds to the seller in the same amount as
reflected on the SAFE certificate. This means that in the event of any post closing adjustment to the
purchase price, the buyer and the seller need to re-apply with the PRC authorities for amendments to the
purchase price; this is a rather cumbersome process. Accordingly, in the event of any post-closing
adjustment to the purchase price, the buyer normally needs to seek the approval of the PRC authorities
before it can reduce or increase the purchase price. It is not uncommon for PRC officials to insist that the
purchase price be paid in full as reflected in the transaction documents, without any adjustment, due to
their limited knowledge of M&A transaction mechanisms.
5.1.2 Escrow
Due to the PRC foreign exchange controls, the parties tend to avoid escrow arrangements for the
purchase price payment in onshore M&A deals. This is because of the risk that if the escrow account is
in China and the money paid into the account is converted into RMB, there might be difficulties in re-
converting the money back into foreign exchange if the transaction is unravelled. In offshore acquisitions,
in the case of an escrow arrangement the parties normally would agree to engage a third party bank who
will release the buyers funds to the seller after the bank receives satisfactory closing documents from the
seller, according to the transaction documents.
5.2 Representations and warranties
5.2.1 Protective Clauses for the Purchaser
Regardless of the type of transaction adopted and the precise documents needed, the purchaser should
ensure that the acquisition documents include appropriate conditions precedent, as well as a set of
comprehensive and appropriate representations, warranties and undertakings. Though the purpose of

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due diligence is to ensure that there are no unexpected liabilities and that the business and assets of the
target company are in the condition represented, it is advisable for the acquisition documents to contain
full and comprehensive representations and warranties with specific compensation provisions to cover
any issues that may not have been disclosed and/or discovered in the due diligence. Foreign investors
should note that many target companies and local JV partners in China may resist such clauses, not
necessarily because they have something to hide but simply because they are not used to a lengthy
Western-style list of representations and warranties.
The purchasers expectations as to what constitutes appropriate representations and warranties will also
impact the negotiations of these clauses. Purchasers from common law jurisdictions typically demand
very comprehensive and explicit representations and warranties, while purchasers from civil law
jurisdictions may rely more on statutory protections provided under PRC law and demand fewer explicit
representations and warranties.
5.2.2 Typical Qualification
The typical qualifications to representations and warranties in a PRC M&A deal are similar to other
international M&A deals. They include:
i) knowledge qualifiers e.g. to the best knowledge of one party;
ii) disclosure qualifiers e.g. except as otherwise disclosed by one party; and
iii) public knowledge qualifier e.g. except as otherwise publicly known or available as a result of
searches or enquiries made of any local or statutory authority which have been made or ought
reasonably to have been made by a party.
The parties may negotiate the applicability of the above qualifiers on certain representations or warranties,
depending on the nature of the target companys business and the transaction.
5.2.3 Survival of Representations and Warranties
There is no legal requirement for the minimum survival period of representations and warranties.
Depending on the nature of the target companys business and the bargaining power of the buyer and the
seller, the survival period of representations and warranties may also vary.
Commonly the survival period of representations and warranties ranges from 6 months to 3 years and up
to 5 years for tax warranties. However, it should be noted that there is no statute of limitation for a
taxpayers liabilities resulting from certain tax violations.
5.3 Covenants of the Buyer and Seller
There are no specific statutory covenants that would apply automatically under PRC law for the situation
preceding closing. Accordingly, the buyer and seller typically rely on contractual covenants.
Normally, the buyer is not subject to any major covenants before or after the closing. The seller on the
other hand is normally subject to the following covenants:
Pre-closing, the seller should not, without prior consent of the buyer, do the following:
1) amend its articles of association or similar organizational documents;
2) encumber or dispose any of its assets having a value in excess of [X RMB];
3) enter into any major contracts or make any material change to the terms of any existing contract

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having a total value in excess of [X RMB];
4) enter into any capital commitment with an individual contract value of more than [X RMB];
5) acquire any shares or acquire any assets or business of any other company or other person or
enter into any joint venture with any other person;
6) acquire or dispose of any land use rights or lease rights or grant any lease or third party right in
respect of any of its properties;
7) increase, reduce, or otherwise make any changes to the target companys registered capital;
8) pay any dividend or other equity or capital payment or repayment to its shareholders;
9) make any material changes to the terms of employment of its employees;
10) pay salaries, bonuses or other compensation and benefit, or increase the level of any of the
foregoing, outside the ordinary course of business and inconsistently with the target companys
historical practice;
11) amend the accounting policies or practices or reporting practices existing as of the date of signing
of the transaction contract;
12) commence any litigation or arbitration or agree to any settlement of any legal actions to which it is a
party which has a value in excess of [X RMB]; and
13) assume any liability which will result in any long term and onerous liability or commitment for the
target company or carry out any activities outside of its ordinary course of business or enter into a
transaction not on an arms length basis.
Post-closing, the seller is generally subject to the following covenants:
(a) non-compete with the target companys business; and
(b) non-solicitation/hiring of the target companys employees.
5.4 Conditions Precedent of Closing
5.4.1 General Condition Precedent
In general the condition precedents are specific to the transaction. One commonly used condition
precedent is that all the representations and warranties are true as of the signing and the closing.
5.4.2 Specific Condition Precedent for PRC M&A Deals
Aside from other closing conditions commonly seen in M&A deals, typical closing conditions of the buyer
and the seller in PRC M&A deals are as follows:
1) The PRC Approval Authority has approved and agreed to the transaction without imposing any
additional terms and conditions that are unacceptable to the buyer and without making any
modifications to the transaction documents that are unacceptable to the buyer; and
2) The target company with the Buyer as the new investor and the articles of association have been
approved by the PRC Approval Authority and registered with the administration of industry and
commerce (AIC, i.e the PRC corporate registration authority) and AIC has issued to the target

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company a new business licence reflecting all necessary changes of the target company as a
consequence of the acquisition.
The above are typical conditions precedent in PRC M&A deals due to the reason that an acquisition
(depending on the structure of the deal) would normally be approved by the PRC approval authorities and
the corporate registration must done by the AIC to effect necessary changes of the target company as a
consequence of the acquisition.
5.5 Indemnification provisions
5.5.1 Scope of Indemnification
Normally the indemnification provisions will include the following:
(a) any breach of representations and warranties;
(b) any penalties charged by the PRC authorities as a result of non-compliance of the target
company;
(c) depending on the nature of the target companys business, damages caused by major
environmental, employment, land, intellectual property issues of the target company; and
(d) any other damages caused by the target companys prior or on-going activities.
5.5.2 Limitations of Indemnification
The exact indemnification mechanism will be subject to the agreement by the parties. In general,
indemnifications are normally subject to the following limitations, qualification and mechanism:
(a) an overall cap of the total indemnification, which normally does not exceed the total purchase
price;
(b) a minimum amount of any single claim before it can be counted as an indemnifiable claim;
(c) a minimum amount for an indemnifiable claim before it can be brought by the buyer for
indemnification; and
(d) for any indemnification against third party claims, the indemnified party should provide prior notice
to the indemnifying party. The indemnifying party shall decide whether to defend the third party
claim within a certain period of time. In the event of a defence by the indemnifying party, the
indemnified party shall provide full cooperation and shall not settle the third party claim without
the indemnifying partys consent. In the event the indemnifying party does not take the defence,
then the indemnified party is entitled to settle any amount it deems reasonable with the third party.
From the indemnifying partys point of view, it would like to have a lower overall cap for the
indemnification, a higher threshold for a single claim to be counted as an indemnifiable claim and a higher
threshold for an indemnifiable claim to be brought against it. Vice versa for the indemnified partys point
of view.
On the other hand, the following issues are worth noting under PRC laws (assuming the contract is
governed by PRC law and liquidated damages are provided as remedy for breach of contract):
(a) the suffering party needs to prove the damage caused by the breaching party in the case of a
compensation claim;

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(b) in the case of liquidated damages, PRC courts normally will respect the amount set in the
contract. However, a PRC court has the power to adjust the amount of the liquidated damages in
the event it considers the liquidated damages to be substantially higher or lower than the actual
damages caused to the suffering party. In such case, the party requesting the adjustment needs
to prove the actual damages caused to the suffering party;
(c) the concept of indemnification is not similar to the one under common law. Under PRC laws,
indemnification is usually interpreted as a right to claim against the other party in the occurrence
of a breach of contract;
(d) under PRC Contract Law, the suffering party has the duty to mitigate losses in the event of a
breach by the other party. Any additional losses caused by to the suffering partys failure to
mitigate shall not be attributed to the breaching party.
5.6 Disputes resolution
Any onshore acquisition shall be governed by PRC law. The parties are free to choose the governing law
in the case of an offshore acquisition.
In the event of any dispute, the parties may agree to resolve it either in a PRC court or through arbitration.
Given the fact that some foreign companies may still have concerns about local protectionism as well as
the capability of PRC courts, they often choose international arbitration in China for dispute resolution.
Note that China is a signatory to the New York Convention. The Supreme Court of the PRC has issued
notice requesting all PRC courts to recognize and enforce arbitration awards given in other member
countries of the New York Convention.

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